DISCUSSION QUESTIONS 1 & 2

9 Assessing Market Opportunities and Targeting Market Segments

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The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.

—Peter Drucker

Learning Objectives

After reading this chapter, you should be able to do the following:

• Delineate the importance of performing a market opportunity analysis, and explain the process of assess- ing market opportunities.

• Identify the four activities involved in completing a market demand analysis, and discuss commonly used bases for market segmentation.

• Explain the use of three methods for measuring market potential.

• Discuss the substeps of the market segmentation and target marketing phases and the steps involved in the market segmentation process.

Section 9.1Market Opportunity Analysis

Introduction This chapter focuses on the details of identifying market opportunities, evaluating these opportunities, and then deciding whether to pursue an opportunity. The careful analysis of a marketing opportunity not only helps the organization grow by pursuing feasible opportuni- ties, it also helps the organization avoid the costly mistake of pursuing an opportunity that is not really viable, or one for which the internal resources are insufficient for its sustainment over the long run.

9.1 Market Opportunity Analysis Market opportunity analysis is the process of defining the exact nature of the opportunities available in an organization’s operating environment in terms of external, financial, and internal considerations. Figure 9.1 presents an overview of this process in terms of the steps involved in the analysis.

As this diagram depicts, opportunity analysis is a comprehensive analysis of all aspects of an alternative before decisions are made to pursue it. The results of such an analysis put the decision-maker in a position of having a strong database from which to choose among the various alternatives present in the environment in line with financial and internal considerations that are specified by management.

The analysis begins with a detailed study of the environment in which the proposed business would operate. This includes not only the political, legal, economic, social, cultural, and tech- nological environments, but also market size, growth trends, and consumers’ attitudes and behavior. It also involves a study of current and potential competitors who may be going after the same customers the organization proposes to attract. These factors are external to the organization or person contemplating the new venture; therefore, a thorough analysis of these factors requires a great deal of diligence. The analysis usually involves a substantial commit- ment of time and money to collect the necessary information. The tools used in the opportu- nity assessment process are illustrated in Figure 9.1.

If the environmental analysis indicates that these factors are favorable to the potential business, then a further analysis of the financial implications of the opportunity should be undertaken. The financial analysis is the key to determining the potential feasibility of the opportunity and the expected impact on revenues and costs. The results of this analysis provide the informa- tion needed to ensure that resources will be allocated to the most attractive opportunities.

The final area of analysis involves a study of internal factors that affect the decision to pursue a given opportunity. The organization’s purpose, objectives, and resources must be analyzed in relation to the proposed opportunity. An opportunity—even, potentially, a profitable one— may not fit with the purpose, the objectives, or the resources of the organization. Such opportuni- ties are forgone for others that do fit.

As Figure 9.1 emphasizes, a thorough study of the opportunity is completed before a deci- sion is made to pursue it. Rushing into a decision without the type of analysis described in

Section 9.2Market Demand Analysis

this textbook greatly increases the chances of failure. Although failures cannot be completely eliminated because of unforeseen circumstances, the chance of success can be greatly enhanced by thoroughly assessing the opportunities before making commitments.

Figure 9.1: The opportunity assessment process

Assessment of the external, financial, and internal considerations helps an organization pinpoint the exact nature of opportunities within its operating environment.

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Financial considerations

External considerations

Internal considerations

Resources

Profitability analysis

Cost analysis

Competitive analysis

Consumer/Market analysis

Opportunity ranking

Purpose

Investment analysis

Revenue analysis

Social/Cultural/ Technological environment

Political/Legal/ Economic environment

Objectives

9.2 Market Demand Analysis After a thorough study, using the PESTLE framework, of external factors influencing the operating environment (as described in Chapter 4), the management of an HCO would next turn their focus to the analysis of the market demand for a healthcare service. An analysis of market demand involves (a) identifying a market, (b) identifying market factors, (c) esti- mating market potential, and (d) estimating the revenues anticipated from a given venture. This chapter briefly examines these four activities involved in completing a market demand analysis.

Section 9.2Market Demand Analysis

Identifying a Market A fundamental concept that underlies the type of analysis described in this chapter is this: What is sometimes referred to as a market for a product or service is actually a composite of smaller markets, each with identifiable characteristics. One way to identify a market is through market segmentation, which was discussed in Chapter 7. Segmentation is a strat- egy that aggregates consumer (or patient) groups with similar characteristics and common interests. The dental market, for example, refers to a broad market sector that is composed of smaller submarkets, or market segments. This market can be segmented in several ways to identify the various submarkets: The type of patients served (children or adults), the ser- vices sought (general dentistry, oral surgery, or cosmetic), etc. This process of breaking up a market into its constituent parts is called market segmentation. The basic premise is that the patients in one market are different from the patients in another market, and, therefore, each represents a separate entity.

An example of market segmentation in the medical equipment and supply industry is illus- trated in Figure 9.2. Medical equipment manufacturers and supply companies segment their market between healthcare facilities and retail outlets, such as drugstores. Treatment equip- ment that requires use by trained professionals is marketed to healthcare facilities, while commonly used equipment (diabetic testing devices, crutches, inhalers, and so forth) is mar- keted to retail outlets. Note that the manufacturers can further segment the healthcare facil- ity market into hospitals, nursing homes, clinics, and home health agencies. As Figure 9.2 illustrates, the same segmentation strategy is used by drug companies. Markets are broadly divided between prescription drugs and over-the-counter (OTC) drugs.

Figure 9.2: Four segments of healthcare and two major markets

Organizations in the medical equipment and supply industry segment markets into two major categories: healthcare facilities and retail outlets.

f09.02_MHA 626.ai

Over-the-counter drugs

Patients who need care visit hospitals, nursing homes and

other facilities.

Individuals who do not require a doctor’s

prescription to buy drugs and medical

supplies. Medical

equipment and supply companies

Healthcare facilities

Bandages, first aid,

etc.

Advanced treatments

and prescription

drugs

Treatment equipment

Major drug developers Biotechnology and special treatment

developers

Source: Wikinvest http://www.wikinvest.com/industry/Pharma_%26_Healthcare

Section 9.2Market Demand Analysis

Markets are too complex and diverse to consider all patients within the market as homoge- neous. If a new service is to appeal to older adult women, for example, then that segment or part of the total market in the age group 55 and up is the market of interest. Its size and char- acteristics must be identified and studied; the other segments are not considered.

Bases for Market Segmentation Commonly used bases for segmentation include (a) geographic and demographic, (b) prod- uct usage and benefits sought, and (c) lifestyle and psychographic. Brief discussions of these bases for segmentation follow.

Geographic and Demographic Segmentation One approach to segmentation involves using geographic and demographic variables to seg- ment markets. Geographic segmentation involves the use of census tracts, cities, trade areas, counties, states, regions, and countries as the basis of segmentation. For many services, this is a logical framework. Demographic segmentation involves using variables such as gender, age, income, educational level, and so forth as the basis for segmenting a market. These vari- ables are appropriate for many healthcare services. For example, the number of women of childbearing age determines the size of the obstetrics market.

Product Usage and Benefits Sought Segmentation Another approach to market segmentation, product usage segmentation, concentrates on the product usage patterns of consumers as the basis for segmentation. Patients are classi- fied as users or nonusers, and users are further classified as frequent and infrequent users. In many service categories, a small percentage of patients may account for a large portion of users. Dermatological services are an example of a medical service with varying usage rates. Thus, usage rates become important as a basis for segmentation for some products.

Benefits sought segmentation is another way to segment markets and is based on the ben- efits the patients or consumers expect to receive upon purchase or use of a product. In one study, the toothpaste market was segmented on such variables as flavor and product appear- ance, brightness of teeth, decay prevention, and price. Each of these variables represents the principal benefits sought by the purchaser. Each of these benefits sought segments, in turn, is composed of consumers with different demographics, personalities, lifestyles, and so forth. Thus, each represents a distinct market segment.

Lifestyle and Psychographic Segmentation Another segmentation approach to selecting target markets involves lifestyle and psycho- graphics. Although the concepts of lifestyle and psychographics are often used interchange- ably, they are not equivalent, but they are complementary.

The term lifestyle is not new, but its application to marketing has been rather recent. From our perspective, lifestyle can be viewed as a unique pattern of living, which influences and is

Section 9.2Market Demand Analysis

a reflection of a person’s consumption behavior. Therefore, a lifestyle marketing perspective is one that recognizes that people can be sorted into groups based on what they like to do. Thus, marketers attempt to identify patterns of consumption for people who share a similar lifestyle (Solomon, 2013). For example, HCOs that advertise sports medicine programs are often targeting active adults who may develop runner’s knee or tennis elbow.

How does the concept of psychographics relate to lifestyle? Psychographics is the “use of psy- chological, sociological, and anthropological factors to construct market segments” (Solomon, 2013, p. 586). Thus, psychographics pertains to why consumers do what they do. One of the more precise statements about its nature is the following: Psychographics is the systematic use of relevant activity, interest, and opinion constructs to quantitatively explore and explain the communicating, purchasing, and consuming behaviors of persons for brands, products, and clusters of products.

Psychographics can be used in healthcare marketing in the following important ways (Solo- mon, 2013):

• To define the target market: For example, the Low T Center was developed to help men, primarily in the 40–60 age group, who experience erectile dysfunction or weight gain due to low testosterone levels (Low T Center, 2013).

• To create a new view of the market: For example, rather than portraying people over age 65 as being retired and sedentary, psychographic research can identify the increasing number of seniors who are psychically active and continuing to work.

• To position a product or service: For example, people with an active lifestyle often want treatment that is fast, convenient, and involves a minimum of reha- bilitation. This has led many HCOs to advertise same-day surgery in surgical ambulatory centers.

• To market social issues: For example, it is well known that obesity is a problem in the developed world, particularly in the United States. Psychographic analy- sis can help government officials and healthcare providers target information to populations whose lifestyles lead to obesity (Centers for Disease Control and Prevention, 2013).

• To better communicate with patients and potential patients: Research indicates that consumers who possess the psychographic characteristics of health conscious- ness, consumerism, and environmental consciousness are more likely to seek health information than other healthcare consumers (Dutta-Bergman, 2003). Thus, it is important for an HCO to make its health information easy to locate and useful to consumers.

The Technique of Lifestyle Segmentation Lifestyle segmentation research measures (a) how people spend their time engaging in activities; (b) what is of most interest or importance to them in their immediate surround- ings; and (c) their opinions and views about themselves and the world around them. Together, these three areas are generally referred to as activities, interests, and opinions (AIOs).

In a typical, large-scale lifestyle research project, questionnaires are mailed to members of a nationwide consumer panel. (There are other methods available to conduct this type of research, such as an online panel; research results will be affected by the representativeness

Section 9.2Market Demand Analysis

of the panel.) The questionnaires solicit traditional demographic information, average usage rates for as many as 100 different products, media habits, and respondents’ AIOs. Approxi- mately 300 AIO statements may be included, to which respondents indicate, for example, the extent of their agreement, in response to a statement, on a six-point Likert scale, which ranges from Strongly Agree to Strongly Disagree. The following are typical of the AIO statements employed:

• I have more self-confidence than most of my friends. • Our family is too heavily in debt today. • I am a homebody. • I like to be considered a leader. • I would be willing to pay more for a product with all natural ingredients. • I am an impulse buyer. • My family is the most important thing to me.

Armed with these three sets of consumer data (AIOs, demographics, and product usage) from the completed questionnaires, the marketer constructs user profiles. The analysis involves relating levels of agreement on all AIO items with the levels of usage of a product and with demographic characteristics. Typically, a pattern emerges in which AIO statements cluster together; that is, the respondents are grouped together from a similar lifestyle perspective. Lifestyle, or AIO, segmentation analysis has been greatly enhanced by the availability of data from marketing consulting firms such as Yankelovich, Inc.

The Measurement of Consumer Motivations and Resources Psychographic research is available from VALS™ (this is not an acronym), a consumer seg- mentation based on psychological characteristics and several key demographics that corre- late with consumer behavior. Developed by SRI International and currently owned by Stra- tegic Business Insights, VALS is a validated segmentation that can be replicated with a high degree of reliability, using different population samples, and the results are trendable. Unlike lifestyle segmentations that use cluster or regression analysis models to determine consumer groups, VALS uses a 39-question survey and proprietary algorithm. To take the US VALS sur- vey, go to http://www.strategicbusinessinsights.com/vals/presurvey.shtml. To receive an accurate VALS type, your first language must be American English. If you are not a citizen of the United States or Canada, your residency there should be for sufficient time to know the culture of either country and its idioms. You must meet these conditions for your VALS type to be valid.

As shown in Figure 9.3, VALS measures two key concepts: motivations and resources. Adults are classified into one of eight consumer groups, which are described succinctly following the figure. The resource dimension includes a variety of material, emotional, and psychological resources such as income, education, self-confidence, health, eagerness to buy, and energy level. Motivations identify consumer groups by their underlying driver: ideals, achievement, and self-expression. For example, although each group has exposure to the same products and media, responses differ because each group’s motivations (self-perception) and resources— the ability to realize their self-perception in the marketplace—differ. Lifestyle, media, and consumer-behavior data are collected annually through GfK MRI’s Survey of the American Consumer® and proprietary surveys in which the VALS survey is embedded. As a result, VALS is often used to develop robust target-group profiles and to provide consumer insight:

Section 9.2Market Demand Analysis

• Innovators are: Self-confident; receptive to new products, technologies, and delivery channels; globally aware; abstract thinkers; active and involved; 10% of U.S. adults.

• Thinkers are: People who value knowledge, look for function over form, think glob- ally but act locally, want to stay healthy because it is responsible to do so, 11% of U.S. adults.

• Achievers are: Status-conscious, middle-class, focused on family and career, not will- ing to sacrifice, skeptical, reward-seeking, 14% of U.S. adults.

• Experiencers are: Self-absorbed, inexperienced, very optimistic, stimulation-seeking, not interested in details, irreverent, social-media socialites, cynical, 13% of U.S. adults.

• Believers are: Conservative, traditional, family-focused, slow to change, unsure, responsible, literal, 16.5% of U.S. adults.

• Strivers are: Disenfranchised; lack the skills, education, and tenacity to change their lot in life; want to belong to more affluent groups; are largely uninformed; 11.5% of U.S. adults.

• Makers are: Self-reliant and independent, distrustful of government and large institutions, practical, helpful, close to nature, unimpressed by luxuries, 12% of U.S. adults.

• Survivors are: Mature; often in ill health; appreciative of small, thoughtful gestures; dependent on social safety-net programs; trustful of most authority figures; 12% of U.S. adults.

Figure 9.3: Psychographic segments

Psychographic segments help marketers better understand and predict consumer behaviors.

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Ideals

THINKERS

BELIEVERS

Primary motivation

High resources High innovation

Low resources Low innovation

US VALS Framework

Achievement

ACHIEVERS

INNOVATORS

STRIVERS

SURVIVORS

Self-Expression

EXPERIENCERS

MAKERS

Source: www.strategicbusinessinsights.com/vals © 2014 by Strategic Business Insights. Al rights reserved.

Section 9.3Market Potential

The Application of Lifestyle Segmentation Lifestyle may be used as a basis for segmentation in several ways. In one approach, the mar- keter seeks to classify the consumer population into groups based on general lifestyle char- acteristics; in this manner, the consumers within a specific group will have a similar lifestyle. Using the research approach described in a preceding subsection, a representative sample of consumers responds to a questionnaire containing AIOs, product usage, media consumption, and demographic items. Through statistical routines (clustering and others), the marketer attempts to discern whether those consumers, based on their responses, can be formed into distinct groups. Each group represents a different pattern of needs for, and consumption of, products and services. Once these groups are identified, the marketer is able to direct his or her product to appeal to one or several lifestyle segments.

9.3 Market Potential Once a market has been divided into various segments, and characteristics of consumers and market factors in each market have been analyzed, the next step is to estimate the size of the market. The term market potential refers to the expected revenue of a product or service for an entire market. More simply, if everybody that could buy would buy, how many units or dollars’ worth of revenue would be produced? The answer to that question is the market potential. A market segment that does not have enough consumers spending enough dollars does not jus- tify effort unless a firm is seeking to accomplish some nonrevenue-related objective. An orga- nization is not just seeking consumer markets, but markets that can be served profitably by that organization in attempting to meet their needs. Market potential is a quantitative measure of a market’s capacity to consume a product in a given time period, which is a prerequisite to assessing profitability.

Market potential can be measured in either absolute or relative terms. An absolute measure is one that can be expressed in units or dollars, and a relative measure relates one part of a mar- ket to another and is expressed as a percentage. Techniques for estimating market potential are discussed in the following subsections.

Revenue Index Measure of Relative Potential The revenue index method provides a relative measure of potential for products that have reached the maturity stage. This technique is useful in answering questions about the relative potential of various geographical market areas. Its use requires familiarity with the product in terms of revenues and penetration of distribution in various areas, and it also requires a revenue history.

This technique is illustrated in the artificial product data listed in Table 9.1. Notice that the resulting figures are percentages of total industry revenue by region. This table, in effect, illustrates that industry revenue will occur next year in the same proportion as last year’s, in each region. The potential in the northwest region is expected to be 23.2% of the total— whatever that total turns out to be next year. This measure of potential allows one region to be compared to another.

Section 9.3Market Potential

Table 9.1: Revenue index method

Region Industry Revenue Revenue Index Potential

Northeast $8,500,009 28.8% 28.8%

Southeast 6,753,090 22.8 22.8

Northwest 6,870,421 23.2 23.2

Southwest 7,430,218 25.2 25.2

29,553,738 100.0% 100.0%

Market Factor Method Normally, a relative measure of potential is not adequate, and an absolute measure of poten- tial is needed to provide estimates of potential in units or dollars. One technique for accom- plishing this is the market factor method. This method involves identifying the factors that influ- ence the revenue of a good or service and relating the factors to revenue in some way. Table 9.2 shows an example of this method, using population as the market factor. Population is related to revenue in this example through the revenue rate or dollars of revenue per 1,000 people. Notice that absolute and relative potential could be calculated by region by using the pro- jected regional population as the factor and the regional revenue rate as the market factor in each region.

Table 9.2: The market factor method

Region Revenue ($)

Population (000)

Revenue Rate/ 1,000

Northeast $ 8,500,009 68,570 $123.96

Southeast 6,753,090 38,720 174.40

Northwest 6,870,421 32,810 209.40

Southwest 7,430,218 66,730 111.34

$29,553,738 206,830 $154.78 (avg.)

Note: Population projection (next year) = 210,847; revenue rate (average) = $152.78/1,000; potential ($154.78 × 210,847) = $.

Given a market segment, the number of people in that segment, and an expenditure rate, the potential of that segment can be calculated. Using this technique produces an estimate of the absolute potential of a given market. This technique would be appropriate when an estab- lished market is being evaluated.

Regression Analysis Method Another technique for estimating market potential involves the use of a statistical technique known as regression analysis. This technique still makes use of market factors, but the market factors are related to revenue in a more mathematically complex manner. Space does not permit a

Section 9.3Market Potential

complete explanation of this technique. The purpose here is to show how it could be used in estimating potential. One result of regression analysis is an equation that relates the market factor to revenue. If more than one market factor is used, then multiple regression analyses are needed.

After a regression analysis has been completed, a financial analysis should be undertaken. The financial analysis usually covers at least four different areas: (a) revenue analysis, (b) cost analysis, (c) cash flow analysis, and (d) analysis of return on investment.

As described in Chapter 8, one of the most beneficial ways to combine these four types of analyses is to use the concept of a pro forma income statement as the basic document to be generated by the financial analysis. A pro forma income statement is a projected income statement for a specific, future time period, using estimates of the revenues and costs associ- ated with that time period. It provides an estimate of future cash flows to be produced by a given market segment that can be discounted to determine the present value of these cash flows. This, in turn, is used in calculating the rate of return anticipated as achievable from a given segment.

A pro forma income statement for a proposed opportunity is shown in Table 9.3. The approach used for this venture was to develop three alternate pro forma statements, each based on a different assumption about revenues generated by the new venture. This approach permits identifying the optimistic, pessimistic, and most likely scenarios of a given situation. It is also in line with a more realistic approach to demand forecasting, which produces a range of rev- enue volume for new products. When products or services have already been on the market for several years, industry revenue history is available to use in projecting revenue.

Table 9.3: Pro forma income statement for a satellite clinic

Low (Pessimistic)

Medium (Most likely)

High (Optimistic)

Revenue  Cost of revenue  Gross margin

$3,500,000 2,500,000

$1,000,000

$4,500,000 3,400,000

$1,100,000

$5,500,000 4,300,000

$1,200,000

Expenses  Direct selling  Advertising   Transportation and storage  Depreciation  Credit and collections  Financial and clerical  Administrative

457,000 157,000

28,000 15,000 12,000 29,000 55,000

480,000 168,000

38,000 15,000 14,000 38,000 55,000

512,000 180,000

48,000 15,000 16,000 47,000 55,000

Total expenses $753,000 $808,000 $873,000

Profit before taxes $247,000 $292,000 $327,000

Net profit after taxes (NPAT) $128,440 $151,840 $170,040

Cash flow (NPAT + Depreciation) $143,440 $166,840 $185,040

Section 9.3Market Potential

Revenues and costs can change radically over the course of a product’s longevity. For example, high investments in promotion and building a distribution network produce losses in early years; on the other hand, reduced variable costs achieved by increasing production efficiency and technological improvement may produce high profit levels in later years. Consequently, any realistic financial analysis must take into consideration an adequate time frame and asso- ciated changes in cost structures.

Because the financial analysis of a given opportunity is usually long-run in nature, either the pro forma income statement must be estimated for each year, for some assumed length of time, or an “average” year can be used that represents three to five years into the future. Then, the discounted cash flow from this average year is used as an average for the venture’s anticipated life to calculate the return on investment or break-even point of the project. The return on investment can be calculated for each alternative and then compared with a prede- termined rate to evaluate the financial impact of each alternative.

Developing a pro forma income statement requires a forecast of both expected revenues and operating expenses. The procedures for developing each of these estimates are discussed later in this chapter. Thus, the revenue analysis produces an estimate of revenues, the cost analysis produces an estimate of the costs associated with those revenues, and the analysis of return on investment or break-even point relates those returns to the investment to be made in the venture. This, in turn, provides the answer to the basic question posed in financial anal- ysis: What is the projected financial impact of pursuing this particular market opportunity?

Not-for-Profit Financial Analysis Many not-for-profit organizations fail to apply this basic approach of opportunity assessment to their decision-making. While the emphasis is on matching revenues and costs (break- even), it is a very useful approach to making major commitments of resources. A hospital, for example, might decide to build a new wing for geriatric outpatients, providing rehabilita- tion services for discharged patients recovering from major traumas, such as strokes or heart attacks. The facility might be built and opened to accommodate 25 patients. However, if only two patients showed up to take advantage of the new facility when it opened, it would close within a few months. An analysis of demand for such services before their provision would have avoided such a costly mistake.

Although the analysis of returns from a decision made by a not-for-profit organization uses different criteria, such an evaluation should be made nonetheless. This type of analysis is sim- ply an application of a basic management concept: Evaluate the impact of a decision before the decision is made. This principle applies to not-for-profit as well as for-profit organiza- tions. One type of analysis especially suited for not-for-profits is the benefit-cost analysis, which attempts to answer the question of whether the benefits outweigh the costs for a par- ticular program.

Cost Analysis Revenue analysis, even by segments, is only part of the information needed to understand the nature of a firm’s current marketing operations. Revenue analysis, considered alone, can even

Section 9.3Market Potential

be misleading. A product low in revenue volume may not be low in its profit contribution. Revenue and profitability can be determined only through revenue and cost analysis.

The use of cost estimates for planning purposes is very important in developing the project cost summary. The firm’s chief accounting officer should be instrumental in assembling the cost data used as a basis for a company’s new-venture activities.

As demand analysis estimated the market potential of the new project, product, or services, cost analysis is the basis for determining the actual financial and technical feasibility of the proposed activity.

Cost estimates must be provided for the following categories:

1. Fixed investments, such as land, buildings, fixtures, and other equipment 2. Manufacturing costs, such as direct material cost, direct labor cost, and manufactur-

ing overhead 3. Start-up expenses, such as training costs, increased overtime, scrap expense, con-

sulting fees, and legal fees 4. Other related expenses

Accurate cost estimates require a solid analysis of the technical requirements of the project. Projects vary in scope and will thus vary in the depth of information needed for this type of analysis. The technological complexity of the project, the amount of resources required for com- pleting the project, and the number of viable alternatives will influence the amount of atten- tion given to the technical analysis. Most new ventures have enough “unknown” characteristics to require close attention to the specific aspects of the project, in order to achieve good cost estimates. Table 9.4 depicts a summary chart for a project.

Table 9.4: Medical equipment manufacturer project cost summary

Category Quantity

Description

Costs Monthly Annual

Fixed Investment Land

Construction cost

Building cost

Security systems

Fire prevention system

Furniture

Fixtures

Production equipment

Office equipment

Trucks

Other investment

(continued)

Section 9.3Market Potential

Category Quantity

Description

Costs Monthly Annual

Manufacturing Costs Direct material

Direct labor

Factory overhead

Maintenance

Utilities

Quality control

Office supplies

Rent

Insurance

Telephone

Depreciation

Taxes

Supervision

Tool room

Misc. expenses

Start-Up Costs Financing expense

Consultant’s fees

Training

Waste

Delay expense

Travel

Legal fees

Other start-up costs

Other Related Requirements

Working capital required

Extraordinary expenses

Administrative expenses

Salaries

Insurance

Supplies

Other costs

Total Cost

Table 9.4: Medical equipment manufacturer project cost summary (continued)

Section 9.4Market Segmentation and Target Marketing

The following forecasting techniques can be used to estimate costs:

1. Judgment techniques: The various experiences of key personnel have led to rules of thumb that can, in some cases, determine certain types of costs. These techniques are subjective in nature and should not be the sole basis for cost analysis.

2. Survey techniques: Just as market information can be acquired through consumer surveys, so can cost information. Personal or telephone interviews with persons with experience in the appropriate field are commonly used. Such surveys of expert opin- ion can generate helpful cost data.

3. Historical data techniques: When historical data is available, cost forecasting can be accomplished by making certain subjective assumptions and then projecting histori- cal cost elements into the future. a. Trend analysis: Computer programs allow the forecaster to project past points

of costs to specific future dates. A simple technique of plotting the past cost history of a certain cost element can be helpful. The scatter diagram technique charts cost data for a number of periods. A line is drawn midway between high and low points. This line is called the line of best fit, or the regression line.

b. Regression analysis: A more sophisticated technique is called regression analysis, which is done by a computer program to determine the relationship between two or more variables. This analysis produces a mathematical model that can be used to make projections of revenue.

9.4 Market Segmentation and Target Marketing Today’s marketplace is characterized as the age of diversity in which consumers demand and get tremendous variety in the products and services they buy—300 different types of cars and light trucks, 400 brands of beer, and 21,000 products in the average supermarket (Solo- mon, 2013). Firms are now employing a strategy of market segmentation and target market- ing to reduce larger markets to specific segments, which will then be targeted with specific marketing mixes.

Section 9.2 of this chapter discussed market segmentation as part of the market analysis. Target marketing is a related term that describes the array of activities—the marketing mix— necessary to reduce that larger market to manageable segments. Segmentation denotes the activities necessary to define the subgroups (target markets) and target marketing denotes the activities necessary for directing the marketing efforts toward the target markets on the basis of their needs and characteristics. Essentially, this strategy encompasses a two-phase process. As previously discussed in this chapter, the first phase, market segmentation, involves identifying the different segmentation bases and developing measures of the relative attrac- tiveness of the identified segments. We need to know the size of each market segment and its identifying characteristics. The second phase, target marketing, involves the selection of one or more of the segments and the development of a positioning and marketing mix for each. Table 9.5 breaks down these two phases into substeps.

Section 9.4Market Segmentation and Target Marketing

Table 9.5: The two-phase strategy of market segmentation and target marketing

Phase One: Market Segmentation Phase Two: Target Marketing

1. Identify bases for segmenting the market. 1. Select the target market(s).

2. Develop profiles of resulting segments. 2. Develop positioning for each target market.

3. Develop measures of segment. 3. Develop marketing mix attractiveness for each target market.

The chosen segmentation base should produce segments with the following characteristics:

• Mutual exclusivity. Each segment should be conceptually separable from all other segments.

• Exhaustiveness. Every potential target member should be included in some segment. • Measurability. This is the degree to which the size, purchasing power, and profile of

the resulting segments can be readily measured. • Accessibility. This is the degree to which the resulting segments can be effectively

reached and served. • Substantiality. This is the degree to which the resulting segments are large enough to

be worth pursuing. • Differential responsiveness. This is perhaps the most crucial criterion. A segmen-

tation scheme may meet all of the above criteria but several or all segments may respond exactly alike to different amounts, types, and timing of strategy. In such cases, although it may be conceptually useful to develop separate segments in this way, it is not useful, managerially.

Therefore, from a managerial perspective, the purpose of market segmentation is to develop a limited set of well-defined potential customer groups. Some of the groups are likely to be responsive to an organization’s product offerings. Organizations that are faced with heteroge- neous markets and that follow a market segmentation targeting strategy can usually increase the expected profitability of their marketing activities, pricing, advertising, and distribution— a major theoretical rationale for segmentation.

Companies employing market segmentation typically select several market segments to appeal to with different products, using different promotional efforts and prices, and per- haps selling through different distribution outlets. Many companies fit this description, such as General Motors with its various car divisions and Procter & Gamble, which produces several brands of detergents to meet different consumers’ needs (at least as they are per- ceived by purchasers of these brands). Clearly, with the use of market segmentation, supply conforms to what consumers demand. In addition, because the segments contain fewer and more similar consumers, the marketer is able to obtain more detailed knowledge about their characteristics.

The result of understanding and relating to an increasingly fragmented marketplace is termed micromarketing. For example, Henry Ford Hospital in Detroit, Michigan used Twitter in a live procedure from an operating room. This allowed physicians, medical students, and inter- ested nonmedical personnel to follow along as surgeons tweeted short updates on removing a cancerous tumor. This type of activity can create excitement and raise awareness of the hos- pital. It also aids in recruiting medical personnel (Cohen, 2009). Micromarketing illustrates

Section 9.4Market Segmentation and Target Marketing

why General Motors ships more plain, midsized cars to New England, more front-wheel-drive cars to the Snow Belt states, more muscle cars to California, and more cars with alarm sys- tems to New York City. The company is savvy to the diverse needs of consumer subsegments.

Marketers have increasingly adopted database marketing techniques to reach this frag- mented marketplace. Database marketing involves the development of huge lists of names and addresses of potential customers, who are then courted directly. After they become cus- tomers, their buying patterns are tracked and their brand loyalty is strengthened with special offers, ultimately converting the buyer to an enthusiastic revenue person for the company. The success of database marketing is thus based on the development of large, detailed, sophisti- cated databases containing market-by-market information that can be used to understand consumers and their purchases.

Although market segmentation produces benefits for the firm, it also boosts costs. Typically, manufacturing costs can be higher because of shorter production runs; research costs are higher because of the need to investigate more segments; promotion costs are higher when quantity media discounts are lost; and overlapping market coverage may result in some “can- nibalization,” as one product steals revenue from another in the same company’s line. Thus, market segmentation can result in greater revenue for a company, but at higher costs. Of course, the goal is to increase revenue more than costs, thus raising profits.

Market segmentation studies are a useful way to identify segments and can illustrate a suc- cessful marketing approach. The following eight steps are involved in the segmentation process:

1. Define the problem or determine the use to be made of the research. 2. Select a segmentation basis. 3. Choose a set of descriptors that defines, characterizes, or reflects the segmentation

basis. 4. Select a sample of consumers that is representative of the larger population of

interest. 5. Collect data on segment descriptors from the sample of consumers. 6. Form segments based on chosen consumer descriptors. 7. Establish profiles of segments. 8. Translate the results into marketing strategy.

For example, in Step 1, a medical supply company may want to determine where best to deploy its salespeople to market two types of diabetic testing kits: one for individual use and one to be administrated by medical professionals. In Step 2, the basis for segmentation is business-to-consumer for the kit for individual use, and business-to-business for the kit to be administered by medical professionals.

In Step 3, the manufacturer chooses a description of the ideal market. For example, an ideal market may be one where there is a large, older, affluent population and a concentration of high-end senior living, assisted care, and long-term care facilities.

Market researchers, in Steps 4 and 5, collect sample data (census data, surveys, and so forth) from a sample of the population in the area with type 2 diabetes. From this information, the manufacturer proceeds to Steps 6 and 7 and begins to form marketing segments. For example, the market research may have indicated that the overwhelming majority of type 2 diabetes

Summary & Resources

patients live independently at home. The research may also indicate that the target is finan- cially stable, but not affluent.

Finally, in Step 8, the manufacturer develops a marketing strategy. For example, it may decide to sell the kit to local drugstores through its sales force and to direct market the kit through television advertising.

The a priori approach has been the traditional method of selecting a basis for segmentation. The a priori approach presumes that the segmentation basis is self-evident. However, it has the serious potential limitation that the marketer may not have sufficient information in advance to select the best segmentation basis. Unless one is fortunate enough to begin the process by correctly identifying the most useful basis for segmentation, a less-than- optimum segmentation of the market is likely to occur. The clustering method presents an alterna- tive that addresses this potential limitation of the a priori method. In this approach, rather than selecting a basis for segmentation in advance, the researcher first attempts to see how a sample group of consumers may form their own groupings based on a variety of descriptor variables, such as needs, attitudes, benefits sought, and lifestyle characteristics.

This procedure typically starts with measuring consumers, using a wide variety of descrip- tors. Then, usually with computer-based grouping methods, the researcher attempts to find how consumers may cluster together on the basis of these measures. Such an approach is said to allow consumers to form “natural” groupings, instead of forming only those preestablished by the researcher when the a priori method is used. If such natural groupings are identified, the next step will be to determine what descriptor or set of descriptors may be associated with, or explain, these groupings. This information will then be used to form the basis or bases for segmentation.

Summary & Resources

Chapter Summary This chapter focused on the process of identifying and assessing the attractiveness of differ- ent market segments. A general market must be broken down or divided into various sub- markets to effectively develop the services needed by those submarkets, or market segments. The market identification process entails the use of various techniques to study the charac- teristics of each market segment, determine the size of each market segment, and then deter- mine whether the organization should devote any effort toward attracting consumers in that market segment.

Key Points 1. An opportunity analysis begins with a detailed study of the environment in which

the proposed business would operate. This includes not only the legal, political, economic, social, cultural, and technological environments but also market size, growth trends, and consumers’ attitudes and behavior. It also involves a study of current and potential competitors who may be going after the same customers you propose to attract. These factors are external to the organization contemplating the

Summary & Resources

new venture and therefore a great deal of diligence is required for a thorough analysis of these factors. This usually involves a substantial commitment of time and money to collect the information used in the analysis. If this analysis indicates that these fac- tors are favorable to the potential business, then an analysis of the financial implica- tions of the opportunity should be undertaken. The financial analysis is the key to determining the potential feasibility of the opportunity and the expected impact on revenues and costs. The results of this analysis provide the information that can be used to allocate resources to the most attractive opportunities.

2. What is sometimes referred to as a market for a product or service is actually a com- posite of smaller markets, each with identifiable characteristics. This is a fundamen- tal concept that underlies the type of analysis described in this chapter. When we speak of the dental market, for example, we are making reference to a large market that is composed of smaller submarkets, or market segments. This market can be segmented in several ways to identify the various submarkets, such as the type of patients served (children or adults), the services sought (general dentistry, oral surgery, or cosmetic), and so forth. This process of breaking up a market into its con- stituent parts is called market segmentation. The basic premise is that the patients in one market are different from the patients in another market, and each market therefore represents a separate entity.

3. Markets are too complex and diverse to consider all patients within the market as homogeneous. If a new service is to appeal to older adult women, for example, then that segment or part of the total market in the age group 55 and up is the market of interest. The size and characteristics of this segment must be identified and studied; other segments are not considered for this example. Several commonly used bases for segmentation include geographic/demographic, product usage/benefits sought, and lifestyle/psychographic segmentation.

4. Once a market has been divided into various segments and characteristics of con- sumers, and market factors in each market have been analyzed, the next step is to estimate the size of the market. The term market potential refers to the expected revenue of a product or service for an entire market. A firm is not just seeking con- sumer markets, but markets that can be served profitably by that firm in attempting to meet their needs. Market potential is a quantitative measure of a market’s capac- ity to consume a product in a given time period, which is a prerequisite to assessing profitability. Revenue analysis, even by segments, is only part of the information needed to understand the nature of a firm’s current marketing operations. Revenue analysis, when considered alone, can even be misleading. A product that is low in revenue volume may not be low in its profit contribution. Revenue and profitability can be determined only through revenue and cost analysis.

5. Market segmentation and target marketing are two interrelated terms. Market segmentation denotes the activities that are necessary to define the subgroups— the target markets. Target marketing denotes the activities that are necessary for directing the marketing efforts toward the target markets on the basis of their needs and characteristics. The first step, market segmentation, involves identifying the different segmentation bases and developing measures of the relative attractive- ness of the identified segments. The organization needs to know the size of each market segment and its identifying characteristics. The second step, target market- ing, involves the selection of one or more of the segments and the development of a positioning and marketing mix for each.

Summary & Resources

Key Terms analysis of market demand Involves (a) identifying a market, (b) identifying market factors, (c) estimating market potential, and (d) estimating the revenues anticipated from a given venture.

benefits sought segmentation An approach to market segmentation that segments the market based on the benefits buyers expect to receive when they purchase or use a product.

database marketing Involves the develop- ment of huge lists of names and addresses of potential customers who are then courted directly.

demographic segmentation The use of variables such as gender, age, income, edu- cational level, and so forth as the basis for segmenting a market.

geographic segmentation The use of census tracts, cities, trade areas, counties, states, regions, and countries as the basis for segmenting a market.

lifestyle segmentation An approach to market segmentation that views lifestyle as a unique pattern of living, which influ- ences and is reflected in one’s consumption behavior.

market potential Refers to the expected revenue of a product or service for an entire market.

micromarketing Understanding and relating to an increasingly fragmented marketplace.

product usage segmentation An approach to market segmentation that concentrates on the product-usage patterns of consumers.

psychographic segmentation The use of psychological, sociological, and anthropolog- ical factors to construct market segments.

VALS™ A brand name (not an acronym) that is a consumer psychographic segmentation system based on psychological characteris- tics and several demographics, which cor- relate with consumer behavior.

Critical Thinking Questions 1. If a market exists in a given area, why would it not automatically be considered as an

opportunity for an HCO? 2. Why are market demand and cost analyses important in evaluating a market

segment? 3. What role does a pro forma income statement play in assessing a market

opportunity?